Jul 212014

Center for Financial Policy Senior Fellow, Dr. David Kass, recently published his notes from the annual Berkshire Hathaway meeting on his widely followed blog dedicated to the oracle of Omaha.  The meeting touches on a variety of topics from executive compensation to corporate governance.  The full text can be found here.

Here’s an excerpt on Berkshire’s views on the mortgage market:

Audience: Should the U.S. change the way it finances home purchases and is there a role for Berkshire?

Buffett: The 30 year fixed loan is good for home owners.  It kept costs down.  Government guaranteed part to keep cost down.  No private organization can do it.  It is an $11 trillion market.  Private industry cannot do it, rates would be higher.  How do you keep government in the picture without politics?  Fannie and Freddie did some dumb things on their own, but they were also prodded into doing dumb things by politicians.  I wrote an article when the savings and loans were falling apart.  I suggested the FDIC get the private sector into pricing and evaluating, with the government as the main insurer.  There might be a way that model works in terms of home mortgage insurance.  Berkshire likely would not be a player.  Others would be more optimistic in setting rates.  Private industry might price 5% and the government 95%, and maybe guaranteeing the privates if they went broke.  It is important to get the correct national policy.  It is being worked on.  It is unlikely that Berkshire would play any role.

Munger: When private industry was allowed to take over the system, we got the biggest thieves screwing it up.  As much as I hate government, I’m not trustful of private industry in this field.  The existing system is probably sound.  At the moment, Fannie and Freddie are being conservative and I think that is okay.  I’m not anxious to go back to the race to the bottom with investment banks creating phony securities.  Let them keep doing what they are doing.

Buffett:  The one thing that led Fannie and Freddie astray was serving two masters trying to deliver double digit earnings increases. It would have been fine if they just insured rather than buying portfolios and turning themselves into big hedge funds, and just borrowed cheap and lent long.

Munger:  I think it is a mistake to have private companies taking over the whole mortgage market.  There is no need to have private portfolios. I think that particular experiment in privatization was a total failure.  And we made a billion dollars out of it.  (Note:  Berkshire purchased a large stake in Freddie Mac in 1989 and sold it in 2000.)

Buffett:  I was not going to mention it.


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